Course 6

Leveraged Trading Fees

What you will learn:

  • You pay 0.75% of trading fees on 1x leverage

  • You pay 0.75% x 10 = 7.5% on 10x leverage

  • Leveraged trading fees will eat up your account

  • You need to reduce your trading fees as much as possible

In Course #5 I explained the different parts of your trading system, and one of them is your “cost to trade”, which basically are the trading fees, the order book slippage and sometimes the delay in the execution of your algorithm/API. I also briefly talked about your account size. In this course, I will explain how leverage and trading fees (or slippage, or execution delay), can have a very big impact on your account size.

During this last year, I really spent countless hours brainstorming ways to trade with an algo in a profitable manner. One time, I had a great idea, using position sizing. I thought, what if I enter on the price crossing under the EMA 20 on the 5min timeframe. Using a SL placed at the low of the crossing candle (for a long) or the high of the crossing down candle (for a short), and risking only 1% of my account.

On paper, it sounded like an amazing idea: let’s run it through the assessment checklist from course #5.

Win rate: it was about 30%. I was getting stopped 70% of the time.

Relative size of wins/losses: I would lose only 1%, since my position size was calculated in a way that when I get stopped out on that SL order, it would always equal 1%. But when I won these 30% of the time, the winners would be like 3 times my loss at least, so 3% and more.

Let’s looks real quick what it looks like in theory: on the below chart, I have 7 losses for 1% each and 3 wins for 3% each. Note that on my strategy, the 3% was the minimum. Sometimes I would get 8%, up to 20%. (So I was pretty pumped up).

As you can see, it has a positive expectancy. Meaning I was expecting to get profitable results out of this strategy.

The problem was that after running the strategy for a little bit, the PnL would never get green. I would also be losing money and I simply could not understand it.

Digging into it, here is what I found:

Because I was trading on a small timeframe (5 min), the volatility between the bars, was relatively small. Meaning, when I would place my stop loss on the crossing candle’s high or low, the distance between my entry and my SL would be relatively small.

Look below:

You can see here that the distance between my entry and the SL was basically 0.28%.

If you remember course #0 (the most important) about position sizing, let’s now calculate together my position size.

Position size = Risk % / Distance to SL %

Here, my risk was 1%. So, 1%/0.28% = 3.57

My position size was 3.57 times my account balance. So if I had $1,000, my position would be $3,570.

So far so good.

Now let me remind you what I told you about fees, slippage and order delay with the API/Algo. I measured over time that on average, I could lose 0.18% (when trading spot).

So in my case, I would lose 0.18% of my position which was $3,570.

0.18% of $3,570 is basically 0.0018 x 3570 = $6.426.

Now, this is where it gets annoying: I would basically lose 6.43 on that trade, because of fees slippage and delay. In reality, I would lose $6.43 / $1000 of my account balance. So 6.43/1000 = 0.64%.

So now, I just hit my Stop Loss, so I lose 1% right? YES – but on top, I need to add this stupid extra loss from fees, slippage and API delay. So in total, I lost 1.64%.

If we plug in the numbers into the previous chart:

So now, from a great strategy with a positive expectancy on paper, I had a terrible strategy when running live.

Previously I shared with you how compounding the fees can be terrible. Now I just shared with you how leveraging the fees is as bad.

This is why most strategy don’t work on the long run. This is why a lot of people get burned on the lower timeframes. This is why you MUST pay attention to fees, and you MUST be super detailed oriented, each cent count in trading.

Conclusion: when your strategy uses high leverage, you should only trade in a way to get NO TRADING FEES, LOW SLIPPAGE and NOT RELY ON API SPEED.